Sheila Bair, head of the Federal Deposit Insurance Corporation , is
working hard to reassure everyone that her banks, all 8,305 of them, are
safe. Repeating her familiar mantra Wednesday on the CBS Morning Show, Bair
said of FDIC-protected accounts, “Nobody’s ever lost a penny of insured
deposits.”
Bair had good reason to be out on the stump. She knew that on Thursday the FDIC would release
its report on the health of the country’s savings institutions. Now
the report is out, and you can sum up what it says about American banks in
one word: sick. “There is no question that this is one of the most difficult
periods we have encountered during the FDIC’s 75 years of operation,” said Bair, commenting on the report.
The vast majority of the nation’s banks are still stable. But the report
notes that 12 banks failed last quarter and a total of 25 failed last year.
That was the highest number since 1993, when 50 failed. More disturbing, an additional 252 banks, representing $159 billion in
assets, went on the FDIC’s “problem list,” up from 76 institutions, worth $22
billion, at the beginning of 2008. That increase is already translating into
what could be a record number of bank failures in 2009. Already this year, 19 banks have failed.
Even for healthier banks, there’s an unpleasant picture. In the fourth
quarter of 2008, the nation’s banks as a group lost $26.2 billion, compared
with profits of $575 million for the fourth quarter of 2007. And though
nearly half of the losses were concentrated in four big banks, one-third
of all banks lost money in the fourth quarter, and only 36% reported
year-over-year increases in quarterly earnings. The banks are clearly
bracing for more bad news, setting aside more than 50% of their operating
revenue to cover possible loan losses.
A higher rate of bank failures is increasing strain on the FDIC’s resources.
The agency’s insurance-fund balance dropped by almost half in the fourth
quarter, from $35 billion to $19 billion. To keep funds from dwindling, the
FDIC is going to raise deposit-insurance assessment rates beginning in the
second quarter of 2009, adding to the burden that already-troubled banks
will have to bear.
For the nation’s biggest banks, the U.S. Treasury is providing capital
infusions and now a detailed stress test. Also, Citigroup announced on Friday the outline of a deal with Treasury to
convert the government’s holding of Citi preferred stock into common
shares. The U.S. Treasury could end up owning more than 36% of the ailing
bank. But confidence in the financial
community remains low. Describing a vicious cycle of risk aversion, former
Fed chief and current Obama adviser Paul Volcker told Congress’s joint
economic committee on Thursday that “an insecure bank faced with what it sees
as insecure borrowers is not a very eager lender. It’s a problem of lack of
good borrowers, confident borrowers, as well as weak banks and worried
bankers.” Testifying before the House Committee on Financial Services, James K.
Galbraith, an economist at the University of Texas at Austin, was more blunt about
the government’s capital infusions: “Stuffing the banks with money will not
change their behavior.”
On one front, however, the government’s actions are paying off. Total
deposits in the nation’s banks increased in the fourth quarter
by $307.9 billion as Americans poured their money into the safety of insured
bank accounts. Now the question is, When will banks start to lend
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